Nearshore Americas

Outsourcing Insanity: Price Pressure is Sparking Tension in the Buyer-Seller Dynamic

Why would any company decide to outsource when there are plenty of examples of relationships that have gone badly?  As George Tillman recently wrote in Nearshore Americas – Why do it at all?

Many would assume that outsourcing is a decision to increase profits by exploiting cheaper services, known as labor arbitrage.  A company at some point during its lifetime will be asked to address their corporate philosophies.  One that has received significant attention involves their social responsibilities to their community, shareholders, customers and employees.  In an ideal world this position statement goes beyond words and is carried out by the actions that are undertaken.  What creates a challenge to corporate social responsibility is when actions must be taken that run in opposition to the ideals of the organization.

One such example is when money and the  lure of potentially higher returns becomes a business priority.  Because labor related costs are often at the center of these discussions it stands to reason that the question of social responsibility comes into question when an outsourcing component is considered.

Outsourcing isn’t new and can be linked as far back as early civilizations in Egypt and in the Roman Empire.   Since the early 1900s the US has utilized domestic sourcing (Manpower and Kelly Services) to deliver low cost, temporary staff.  EDS was one of the first to actually introduce service delivery to support the information technology sector.  So while many might wish to point to India or some far shore exotic location, the US was involved heavily in early sourcing activities.

Buyers are making a commodity purchase decision and evaluating a service delivery scenario which has many new elements that are not found in domestic purchases.

Controlling Risk

So why wouldn’t a company want to outsource?  In short it’s all about risk.  If the risks cannot be managed the fallout would significantly affect the well being of the organization.   Some risks can be controlled, such as vendor selection, transitioning and engagement management but others are more challenging to control.  One of the most damaging can be public opinion.  Public opinion can change and as we have seen by the most recent downturn people who would not give much mind to outsourcing are suddenly enraged by the loss of jobs to another nations.

How are Western job losses attributable to the offshore providers?  A closer examination reveals that it all starts with a key strategic decision to save money, increase yields, allocate routine function and provided added innovation opportunities for domestic companies.  It could have been just as easy to provide these opportunities to domestic companies but what gets in the way is the economics.  Sometime the analysis of return-on-investment is inadequately evaluated (domestic vs. foreign labor costs) and such matters as transitioning and oversight are ignored.  Although there are no studies to illustrate the extent to which this might have affected outcome, the impressions after the fact are often used as reason why the deal was not as good as first imagined.

Another leading factor of why a company should think long and hard about outsourcing is their ability to properly evaluate service providers.  Simply put, buyers are making a commodity purchase decision and evaluating a service delivery scenario which has many new elements that are not found in domestic purchases.  Factors like time zone, currencies, supplier viability and safe sourcing are matters that require experienced and informed care.

Social Aspects

Although culture is often pointed to as a factor affecting an outsourced relationship it tends to be more about the business social aspects than those involving culture.  Buyers who are inappropriately matched with providers in terms of size, operating discipline and the interdisciplinary aspects of relationship management will struggle in making the engagement work.  Likewise proper care needs to be exercised in assessing both the viability of the supplier as well as their capability of delivery.  Even though you may be using a Western benchmark the non-domestic supplier will require conversation and adaption of their operating profile.

Even the best deals go terribly wrong with management of the relationship.   Starting with transitioning and continuing through ongoing monitoring & management a service relationship demands continued care.  In theory there is lift-and-drop, domiciled and plug-and-play sourcing strategies but these concepts cannot attain acclaim without strong governance on the parts of both buyer and supplier.

Suppliers are focused on making sales and delivery of service.  The path leading to these goals is unfortunately littered by fundamental inadequacies in core operating viability that places service delivery at risk .  Outsourcing came into play in a meteoric fashion; this resulted in ambitious but frail companies.  All of the best intentions cannot overcome the struggles that a poorly capitalized, single product and inexperience business team will face.  Their survival becomes as much their problem as it will become that of the companies that utilize their services.

What is placing added pressure on viability is the ever increasing demands of buyers to force prices down.   Prior to the economic downturn labor rates allowed for a reasonable win-win relationship to be developed.  What has placed address stress on this situation has been the falling economies have force companies around the globe to reduce their costs (and fees).  With modest margins new economic conditions place suppliers are risk of viability and delivery failure.  Lack of understanding by both parties create failures, most have no retrosourcing strategy that can be exploited expediently.

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Would you enter, expand or hold your present resourcing strategy?  Would you retract from far shores to near shore suppliers?  Are there possible improvements to the way you would or will deploy outsourcing for the benefit of your social responsibility?  Most of the things that happen are avoidable and few are cases where they should come as a complete surprise.  With the allure of windfall returns we sometimes overlook the need to invest.  This is as true for the suppliers as it is for buyers who are mobilizing outsourcing as one of their many business decisions.

At the end of the day, it’s not about size, complexity or hidden legal technicalities it’s about knowledge about the discipline and the cultures that are involved.   I’m not sure if we asked the question, “would you do it again?”, that you would get an honest answer…. Not because of pride but because we simply don’t know whether our reality is normal or it is not.

Jerry E. Durant is Chairman Emeritus at the The International Institute for Outsource Management

Kirk Laughlin

Kirk Laughlin is an award-winning editor and subject expert in information technology and offshore BPO/ contact center strategies.

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